Successful ESG strategy aligns with investor requirements

Environmental action and social impact are crucial changes globally, so why not make it a key part of business? Sustainable commercial growth will follow

What is the true meaning of environmental, social and governance (ESG) strategy? We often hear this term, which can often seem interchangeable with ‘sustainability strategy’, but the terms alone are slightly different. Understanding this leads us to look deeper into their meanings and find out how these terms are nuanced, in order to leverage them in business. And by leverage, we mean understanding how to navigate investor requirements in order to be compliant with ESG as an organisation in the eyes of financial institutions. 

“What emissions do we currently emit in our business operations? How can we make sure that we cut them down so that we actually can help the society we operate?” says Henrik Sandin, Director and Principal ESG Specialist at Workiva. 

“That is such a small proportion of the actual big landscape we should consider here because if you look at the environmental side, nature is a big topic with the TNFD framework helping firms to assess and disclose nature related risk and impacts. Equally, nature related disclosures are a big part of the European Sustainability Reporting standards, under the Corporate Sustainability Reporting Directive, which aligns to the TNFD.”

Sustainability is the buzzword that we see across every corporate site, likewise the term ESG, but sustainability refers to the environmental, social and economic impacts of an organisation. The only difference here is the inclusion of economic factors as opposed to governance. However, governance is surely the starting point for businesses as the way decisions are made ultimately impacts economic growth, and implementing more eco-friendly and ethically compliant solutions will only require further conundrums. 

Nevertheless, ESG strategy is now a major focus for businesses, and will likely become ingrained in all business functions if organisations are to meet certain climate and social impact requirements. In order to charter a sustainable course, the first major step is perhaps the one that organisations struggle with the most—understanding their data. Many of them will already have a larger amount of data available, but likely fragmented and unusable in its current format. Measurability is a critical component of any modern business strategy and, therefore, is a natural process to follow when looking at ESG-specific developments. 

Giving a simplistic example of the Swedish company Sandvik, a global high-tech engineering group, Sandin explains the view of its Chief Sustainability Officer (CSO). He quotes: “‘We as a manufacturing company, if we look at a product, we look at what impact it has on the environment and what to do. What raw materials does it use? What’s the manufacturing process? How much electricity and water is used?’” 

The impact of ESG data on business performance 

Adopting an ESG strategy can be seen as more than just a tick-box exercise or a means of delivering on sustainability messages. There are a number of commercial benefits, particularly as the landscape shifts towards provision of more responsibly sourced products and services. More strategic sourcing will support top-line growth and discoveries lead to better relationships with governing authorities and businesses with ethical practices at the heart of what they do. 

Particularly in the products sector, where consumers are willing to spend on sustainable goods, closer business relationships with suppliers will allow companies to accelerate this message and therefore charge for products accordingly. Although, in order for customers to pay the price for more expensive goods, data must reflect the true nature of sourcing. 

Data can also present areas for change within a business. An example of this is energy consumption, whereby new insight into company electricity usage can draw insight into overusage. ESG is effectively an incentive to look into these factors where businesses could be saving money each year, likewise water consumption and other primary resources.

ESG Controllers make strategy integration imminent

Implementing ESG correctly is a qualifying factor of investment. More financial institutions are preoccupied by environmental and social data as a means of influencing industries to take meaningful actions against climate change and encouraging sourcing of more responsible materials, goods and services. 

“We would suggest that companies really take a holistic approach and understand what their stakeholders are interested in, especially in this multi stakeholder world,” says Kevin O’Connell, ESG Trust Solutions Practice and Global Asset & Wealth Management ESG Leader at PwC. Then identify how you could accomplish that strategy. That's going to involve changes to reporting and tax planning, operations and technology, so that you can provide investment-grade information to your stakeholders.”

This is something that O’Connell explains “revolves around the quality of information that you’re getting”, which is where standards and frameworks come into play. Of course it’s important to understand, firstly, the methods that are most compliant with investors’ needs, but secondly, employ specific personnel—much like investors are doing—to manage climate and social impact reporting. O’Connell says that “ESG controllers are popping up in finance organisations to essentially coordinate all of the data collection”. Working alongside investment firms to understand what the ESG controller role entails could shed light on how they use their own data to the right effect—initially for ESG, but then for securing funds. 

“All of the sources are being provided to the ESG controller, there's analytics or other ways to determine whether that information is accurate,” says O’Connell. “We're slowly seeing people moving to technology solutions to try and automate data collection and just make it a more efficient process, especially if it's going to have to be on AA10K financial reporting.” 

While other organisations will have set the scene for what businesses can achieve, companies newly establishing the presence of sustainability within their businesses can see the requirement of investors as a benefit. The standards and frameworks—and methods of working—supported by investment firms will align with companies leveraging the same. 


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